On Halloween, Connecticut Treasurer Denise Nappier announced the results of the Generally Accepted Accounting Principle Conversion Bond sale to close the state’s budgetary GAAP deficit.
As most households know, the way to balance a budget is simple — current revenue equals or exceeds current expenses. Somehow, for decades, that mathematical equation has eluded the legislative and executive branches of Connecticut government when crafting the state budget. We as a state should acknowledge that our “balanced budgets” are financial farce and move on to confront financial reality.
Is taking on even more long-term debt to close the budgetary GAAP deficit smart? Financially, absolutely not. Politically, maybe, but time will tell.
Three key concepts highlight the disconnect between headlines and the bottom line:
• Connecticut’s “balanced budget” is a political, not a financial exercise. I suspect most of us think of a “balanced budget” as taking in revenue and paying expenses, with a bit of revenue left over or owing a few expenses. In Connecticut state government, nothing could be further from the truth. If Connecticut’s budgets balanced, the state would not be sliding billions of dollars into debt.
• Connecticut does not balance its budget the way a family or business would. Consider your home budget. Annually, you compare your anticipated income, your non-discretionary expenses — taxes, mortgage, rent, utilities, food — your discretionary spending — vacations, clothing — and your anticipated savings. Then you decide just how you are going to allocate income.
If you came up short, you have five choices: cut spending, bring in more income, ignore some bills, refinance your debt, or don’t save. The first two choices, arguably the most sensible, provide your family some long-term fiscal breathing room.
The last three choices make the problem worse in the long-run. Ignoring bills doesn’t make them go away; it only makes balancing the following year’s budget more difficult. Refinanced debt cuts into your family’s cash flow through increased interest costs and more years of debt repayments. Not saving indicates your family is spending more than it can afford.
Connecticut “balances” its budget by borrowing, deferring expenses, and having a negative net worth. In the 10 years between 2002 and 2012 Connecticut’s borrowing nearly doubled from $15.5 to $28.2 billion dollars. That is a direct result of the methods used to balance the budget. No family, nonprofit, or business could reasonably or legally call their budget balanced using Connecticut’s biennially tactics.
• Connecticut’s true financial condition is rarely reported to the public. The truth is readily available through the comptroller’s website in Connecticut’s Consolidated Annual Financial Report (CAFR). The CAFR records Connecticut’s financial results on a Generally Accepted Accounting Principles (GAAP) basis. GAAP is the only approved method of financial reporting, designed to ensure all governments are following the same reporting rules. The only reporting that counts, and can be compared to other states, is the CAFR reporting.
The June 30, 2012 CAFR results show on-balance sheet debt of $29.9 billion and off-balance sheet debt of $ 67.4 billion. In numbers we can understand, that’s $48,900 of debt for every Connecticut taxpayer, by far the highest in the nation. By comparison, $9,318 is the national average per taxpayer debt.
In case you are thinking “This is just how state government works,” take pause to take in the implications. Not all states are in debt. Five states with the highest per taxpayer surpluses are Nebraska at $2,400, Utah at $2, 600, North Dakota at $9,500, Wyoming at $20,200, and Alaska at $21,200.
Will taking on even more long-term debt accomplish the goal of closing the budgetary GAAP deficit? No, Connecticut rarely balances a budget without borrowing for general fund expenses. If the point of the bonds was to pre-borrow the money it won’t help for more than one budget cycle. Biennium after biennium, there is not enough revenue to pay the bills without borrowing, proving that Connecticut’s revenue and spending patterns are out of balance and unsustainable.
As residents, business leaders, and taxpayers, what should we do?
We must insist that the governor and legislature not exercise the trap door they put in the Generally Accepted Accounting Principle Conversion Bond covenant to use the money for an “emergency.”
We must throw out Connecticut’s ridiculous “balanced budget” concept and replace it with one where no future operating budget is balanced by borrowing.
We must adopt pay-as-you-go policies without emergency appropriations or other loopholes.
We must demand financial facts and discount political packaging.
Julie E. McNeal is a CPA and director of finance and operations of the Connecticut Society of CPAs.
